Will Leap's bet on iPhone pay off?

Parent of Cricket Communications to test consumer willingness to pay more upfront

Leap Wireless is betting that its Cricket customers will pay more initially for an iPhone as long as their monthly rate plan remains affordable. Cricket will begin selling iPhones in 60 markets on June 22.

Leap Wireless is betting that its Cricket customers will pay more initially for an iPhone as long as their monthly rate plan remains affordable. Cricket will begin selling iPhones in 60 markets on June 22.

San Diego’s Leap Wireless is betting big that cell phone users will pay more upfront for Apple’s popular iPhone if they can pay less each month for their wireless rate plan.

While this selling strategy is somewhat common in Europe, it hasn’t been tested much in U.S., where wireless carriers provide heavy subsidies on smart phones initially. They make up for those discounts through more costly monthly rate plans and mandatory two-year contracts.

On Thursday, Leap’s Cricket Communications subsidiary turned that pricing model on its head. It will begin selling the iPhone 4 and iPhone 4S on June 22 for $400 and $500 respectively. It’s the first no- contract wireless carrier in the U.S. to offer Apple handsets.

Other carriers such as Verizon, Sprint and AT&T typically sell iPhones for $100 to $200.

But Leap’s monthly rate plan for the iPhone is only $55 a month for unlimited voice, text and data.

Larger carriers charge $110 to $120 a month for similar rate plans.

In a conference call with analysts, Leap executives said iPhone buyers would save about $1,000 over two years with its pricing model.

“We believe investors will soon see if U.S. consumers are willing to pay a point-of-sale premium to achieve recurring expense savings versus the larger carriers,” said Canaccord Genuity analyst Greg Miller in a research report. “Should customers balk at the highest price product in Leap’s portfolio, the company will likely be forced to offer greater subsidies” that would slice deeply into its profit margins.

Other wireless carriers are paying attention. AT&T Chief Executive Randall Stephenson said in a Webcast investor conference on Friday, “We’re going to watch it. I think the whole industry is going to watch it. It’s an interesting model.”

Stephenson doubts, however, that Leap’s pricing plan will resonate with large numbers of consumers.

“You move the entry point by $100 in upfront costs, it has a dramatic effect on demand,” he said.

Apple prices the iPhone 4S to carriers at roughly $650. Leap committed to spend $900 million on iPhones over the next three years to secure the deal with Apple.

“We believe the iPhone could be an effective tool for Leap to attract new subscribers, though the $900 million minimum three-year commitment adds balance sheet risk,” wrote William Power, an analyst with Baird Equity Research, in a note to clients.

Leap would need to sell about 500,000 iPhones a year over the next three years to meet its commitment to Apple. Power doesn’t view that as unreasonable, given the iPhone’s popularity and growth in smart phones. Some current iPhone owners on Sprint and Verizon might switch over to Leap after their contracts expire, he added.

But iPhone users also tend to connect to the Internet via cellular networks a lot said Power. “iPhone data usage volumes have surprised carriers in the past, and Leap’s smaller spectrum portfolio could easily be overwhelmed if adoption is high. We believe Leap could eventually be forced to make additional investments in its network to deal with increasing data usage.”

Both Power and Miller took a wait and see stance on Leap’s iPhone announcement by maintaining their neutral ratings on the stock. BMO Capital downgraded Leap from “market perform” to “underperform” based on the risk of the iPhone deal.

Leap’s shares ended Friday down 71cents, or 12 percent, at $5.06 on the Nasdaq.